Govt to gain USD 2.2 bn from gas price hike: Report

The Cabinet Committee on Economic Affairs (CCEA) had on June 27 approved raising natural gas prices from April 2014 to an average of prevailing rates at international benchmarks and cost of imported LNG into the country.

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Govt to gain USD 2.2 bn from gas price hike: Report

The Cabinet Committee on Economic Affairs (CCEA) had on June 27 approved raising natural gas prices from April 2014 to an average of prevailing rates at international benchmarks and cost of imported LNG into the country.

The Cabinet Committee on Economic Affairs (CCEA) had on June 27 approved raising natural gas prices from April 2014 to an average of prevailing rates at international benchmarks and cost of imported LNG into the country. The indicative price in April is likely to be USD 8 per million British thermal unit as against USD 4.2 currently.

State-owned Oil and Natural Gas Corp ( ONGC ) and Oil India Ltd , which accounts for bulk of natural gas produced in the country, will gain an additional Rs 18,100 crore (USD 3.1 billion) annually, BofA Merrill Lynch said in the report.

About 65 percent of ONGC-OIL's rise in revenue from gas price hike would go to the government as higher royalty, income tax, dividend and dividend tax. "65 per cent of it (USD 2 billion) would go to the government. Rise in KG D6 gas price of Reliance Industries would also boost government royalty and income tax revenue by USD 200 million," it said.

This "USD 2.2 billion revenue rise from gas price hike would be used to fund rise in subsidy," it said.

The report said Finance Minister P Chidambaram had while announcing the CCEA decision stated that no decision has been taken on the input price of gas to user industries of power and fertiliser.

"Although no decision on input price for consumers has been taken, subsidies may be considered for some. The investor concern, therefore, is that subsidies to gas consumers like power producers could imply lower gas price to PSU gas producers - ONGC and OIL," it said.

Stating that some gas consumers are already subsidised by the government, it said, "We believe that even in future the government would bear any rise in subsidy. In our view, the rise in government revenue (USD 2.2 billion assuming gas price goes up to USD 8) from gas price hike would fund any rise in subsidy."

It said if the producers were to bear the subsidy and effectively get a lower gas price then there was no incentive to invest more in exploration and production, which is the main reason for the gas price hike.

Gas consumers in North East and fertiliser producers are subsidised even now. This subsidy is borne by the government and it does not mean lower gas price for ONGC/OIL.

Consumers in North East pay 60 percent of prevailing gas price while OIL, the main gas producer in the region, collects balance 40 per cent of the gas price from the government.

"The proposed gas price hike is not the first gas price hike. Gas price was hiked in 2005 and has gone up by 2.6 times in FY10-13. Subsidies went up when price hikes were made and were borne entirely by the government," it added.

ONGC stock price

On March 31, 2015, Oil and Natural Gas Corporation closed at Rs 306.80, down Rs 7.9, or 2.51 percent. The 52-week high of the share was Rs 472.00 and the 52-week low was Rs 301.00.

The company's trailing 12-month (TTM) EPS was at Rs 21.84 per share as per the quarter ended December 2014. The stock's price-to-earnings (P/E) ratio was 14.05. The latest book value of the company is Rs 159.81 per share. At current value, the price-to-book value of the company is 1.92.